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Australian rates seen rising again in April/May

SYDNEY: The Reserve Bank of Australia is likely to follow up last week's aggressive 0.5 percentage point rate rise with another move in April or May, driven by a keen desire to keep inflation at bay.

After years of lying dormant -- inflation has been below two percent for the past three years -- policymakers are concerned that a booming economy could revive inflation later in the year after income tax cuts kick in alongside massive tax reforms.

The RBA last Wednesday raised the official cash rate to 5.5 percent from 5.0 percent, saying monetary policy was now neutral, after its board meeting on Tuesday.

The rise was double expectations for a quarter-point move, and out of step with quarter-point rises by its counterparts in the U.S., Canada, Britain, Europe and New Zealand in recent weeks.

A Reuters survey of 24 analysts found 18 expect the central bank will raise the official cash rate again in April or May to help slow output growth.

"Whatever the mood reached on Tuesday last week, the hawks will be hungry again in a few months," said HSBC chief economist John Edwards, saying there is unlikely to be a noticeable slowing in output in the next quarter.

The RBA seems particularly concerned with the strength of activity, citing "exceptionally robust" spending, rising house prices, cheap credit and emerging skills shortages.

An early indication of a possible slowing in the labour market came on Monday when the ANZ reported job advertisements fell 6.7 percent in January, though it cautioned against reading too much into figures that can swing widely through the summer months.

Robust jobs growth in 1999 has helped pushed down the unemployment rate to seven percent, with few signs of wage pressures emerging.

The market is sharply divided about the RBA's policy intentions, on both the timing and size of future moves.

The poll found nine analysts said a rate rise in April was most likely, three opted for May, and six said the increase could come in either month. Three cited the second quarter, while another three believe the RBA is done altogether.

POLITICAL FACTORS AT PLAY

Most agree that the peak in rates around 6.0 percent will come by June, before the 10 percent goods and services tax (GST) and hefty income tax cuts take effect in July.

Political sensitivities are seen putting as much distance between the rate rises and the GST as possible, though the federal Opposition was quick to blame last week's hike on the tax.

The unexpected aggression of last week's move has confused expectations for the size of the next increase, with 10 analysts saying the bank will revert to 25-point moves, seven expecting another 50-point hit and four saying it could be either.

"Anything from here will be taking an extra precaution against a build-up of inflationary imbalances," said SG Australia senior economist Glenn Maguire, who sees a 25 point rise in May.

"I think we would have to see a marked acceleration in growth to move policy to the restrictive side of neutral."

RBA Governor Ian Macfarlane will have a chance to explain the reasoning behind the tightening in a speech in Melbourne on Friday. He also appears before a parliamentary committee in Sydney on Wednesday.

Growth is running at a feisty four percent, and has been for several years, without sparking inflation. Inflation is only now nudging the bottom of the central bank's 2-3 percent target zone.

Underlying inflation, excluding the one-off effects of the GST, is not seen rising above three percent, but policymakers have warned higher wage claims or margin-building may trigger a second round of rate rises.

Others note that the economy will be hard enough to read later this year with a multitude of special factors that argue for the bank getting its tightening done early.

"Next financial year (July/June) is such a Factor X with the GST, tax cuts and the Olympics, why throw monetary policy into the foray as well?" said Salomon Smith Barney economist Annette Beacher.-Reuters